Site Search Navigation

Site Navigation

Site Mobile Navigation

Perhaps Dimon Should Blame Dodd-Frank

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute.

Updated November 19, 2014, 3:37 PM

The Basel rules on bank capital were adopted in 1988, ostensibly to level the playing field among internationally active banks. Until that time, each country had adopted its own rules for banks it regulated, and both the rules and their enforcement varied considerably — and as the capital markets became more global, this had introduced significant competitive inequality. The question Jamie Dimon is raising — not unlike the debates over civil rights enforcement in the U.S. — is whether ostensibly nondiscriminatory regulations now under consideration in Basel III may, because of regulations in the U.S., have a “disparate impact” on the largest U.S. banks. If so, Basel III will become a source of anticompetitive discrimination rather than a solution.

Neither the European Union nor any other regulatory jurisdiction has adopted bank reform legislation remotely as restrictive as the Dodd-Frank Act in the U.S.

The most likely source of this disparate impact would arise in the competition for capital. Neither the European Union nor any other regulatory jurisdiction has adopted bank reform legislation that is remotely as restrictive as the Dodd-Frank Act in the U.S. That law strips bank holding companies (not just insured banks) of their ability to trade fixed-income securities for their own accounts and forces them to move their derivatives activities into separately capitalized affiliates that will have to operate with less capital. These rules will substantially reduce U.S. bank profitability. For the largest institutions, such as Dimon’s JPMorgan Chase, the act also directs the Fed to impose regulations that are more “stringent” than those that have prevailed in the past. It’s not yet clear how far the Fed will go with this “stringency.”

Accordingly, the big European and Asian banks with which U.S. banks must compete for capital will have sources of revenue that could make them more profitable than JPMorgan Chase and other large U.S. banks, with no allowance for home country restrictions that reduce their earning power. To Dimon, this could well look like a disparate impact that makes the Basel rules anti-American, but in fairness it could also be characterized as a result of Dodd-Frank’s punitive treatment of the largest U.S. banks.